Method for structuring a supplemental interest mortgage

ABSTRACT

A system and method of structuring a supplemental interest mortgage is disclosed. A principal debt obligation and a supplemental debt obligation based on the principal debt loan are secured by a single security instrument. The principal debt obligation includes the principal loan and principal interest to compensate a lender for use of the lender&#39;s funds. The supplemental debt obligation includes supplemental interest to compensate a lender for the risk of borrower nonpayment.

This application claims priority from U.S. Provisional Application Ser.No. 60/450,664 filed Mar. 3, 2003. The entirety of that provisionalapplication is incorporated herein by reference.

BACKGROUND OF THE INVENTION

1. Field of the Invention

The present invention generally relates to financial systems forprocessing financial information and for securing repayment of loans.More particularly, the present invention relates to systems and methodsfor structuring loans to be secured by mortgages on real estate.

2. Related Art

With home mortgage loans, in addition to requiring periodic repayment ofthe principal balance of a loan through installments, lenders alsocharge interest to compensate the lender for the use of the borrowedfunds and for assuming the risk of nonpayment. Calculation of aninterest rate is partly determined by the lender's cost to provide thefunds for the loan. The interest rate is also determined by the lender'scalculation of a variety of risks, such as the risk that interest rateswill change during the term of the loan, or the risk that the borrowermay cease payments on the debt.

Home mortgage lenders require that borrowers grant the lender a securityinterest in the borrower's home through a mortgage instrument.Consequently, one common measure of risk compares the principal loanbalance to the value of the home that is secured under the mortgage. Thehigher the loan balance is in relation to the value, the greater theamount of risk. Lenders describe this as a loan-to-value (LTV) ratio.Where the loan amount is 80% of the value of the home, the borrower isconsidered to have an 80% LTV ratio. Current underwriting standardsgenerally require loans with LTV ratios greater than 80% or higher than80% to have additional risk protection through some form of additionalsecurity. Borrowers might provide such additional security by paying ahigher interest rate, or through some other means, such as by obtainingmortgage insurance.

Borrowers may also be required to provide additional security where theborrower has a poor credit history, even though the LTV ratio may be aslow as 70% and provide an adequate buffer of equity relative to the loanamount and the value of the home.

While other forms of providing lenders with additional security forrepayment of a home loan exist, either where the LTV ratio exceeds acertain predetermined threshold value (e.g., 80%), or where the borrowerhas poor credit, mortgage insurance is the most common form of providingthat additional security. A mortgage insurance policy protects thelender in the event of a payment default by the borrower by paying thelender some or all of the unpaid balance of the loan and costs offoreclosure upon completion of a foreclosure process under state law.Typically, the borrower pays for the mortgage insurance policy by payinga monthly mortgage insurance premium to the lender in addition to theregular home mortgage principal and interest payment. However, currentU.S. tax laws do not permit a borrower to deduct mortgage insurancepremiums paid and therefore borrowers may prefer an alternative means ofproviding additional security to the lender.

What is needed is a method for structuring a supplemental interestmortgage that offers borrowers an alternative home financing arrangementwithout borrower-paid mortgage insurance for loans that neverthelessrepresent a higher than generally acceptable risk, and providesborrowers with additional benefits, such as tax deductibility of themortgage interest paid and early cancellation of the supplementalinterest mortgage component, among other benefits.

SUMMARY OF THE INVENTION

The present invention meets the above-identified needs by providing asystem and method for structuring a Supplemental Interest Mortgage (“SIMortgage”) that offers borrowers an alternative home financingarrangement for loans that represent a higher than generally acceptablerisk. More specifically, the present invention is directed to systemsand methods for structuring loans such that, in addition to the basicinterest charged for the use of the lender's funds, the borrower ischarged supplemental interest for the lender's risk of borrowernonpayment depending on the risk characteristics of the loan. The riskcharacteristics of the loan that could be used to determine whether toapply a supplemental interest mortgage could include, for instance, theLTV ratio or the borrower's credit history. Both the basic interest andsupplemental interest are based on the unpaid principal loan balance.Repayment of both the basic interest and the supplemental interest aresecured by the borrower's property. Under this novel and alternativefinancing arrangement, if the loan has high risk characteristics, theborrower would pay the lender a supplemental interest rate on theprincipal loan, in addition to interest paid on the principal loanamount, to compensate the lender for assuming increased risk. Becausethe supplemental interest mortgage component is separate from theprincipal loan, the parties may agree to cancel the supplementalinterest mortgage component upon satisfaction of a particular conditionor occurrence of an event, such as an increase in the LTV ratio, or animprovement in the borrower's handling of credit (demonstrated, forinstance, by an improved credit score).

In an embodiment, the method and computer program product of the presentinvention for structuring a supplemental interest mortgage, includes thestep of identifying a principal debt obligation comprising a principalloan and principal interest to compensate a lender for use of lender'sfunds. Next, the method and computer program product identifies asupplemental debt obligation based on the principal debt loan andcomprising supplemental interest to compensate a lender for a risk ofborrower nonpayment, wherein the principal debt obligation and thesupplemental debt obligation are secured by a single securityinstrument.

Further features and advantages of the present invention as well as thestructure and operation of various embodiments of the present inventionare described in detail below with reference to the accompanyingdrawings.

DESCRIPTION OF THE FIGURES

The features and advantages of the present invention will become moreapparent from the detailed description set forth below when taken inconjunction with the drawings in which like reference numbers indicateidentical or functionally similar elements. Additionally, the left-mostdigit of a reference number identifies the drawing in which thereference number first appears.

FIG. 1 is a chart illustrating an interest calculation and paymentcalculation method according to an embodiment of the present invention.

FIG. 2 is a block diagram of an exemplary computer system useful forimplementing the present invention.

DETAILED DESCRIPTION OF THE INVENTION

In an embodiment of the present invention, the principal debt obligationand the supplemental interest obligation are secured by a singlesecurity instrument, requiring all sums due under both loan obligationsbe paid. A default under one loan obligation is a default under theother loan obligation. Both the principal loan obligation and thesupplemental interest obligation are serviced by the same loan servicer.

In an embodiment, the system and method used for an SI Mortgage wouldinvolve at least two separate debt obligations from a homeowner: thefirst debt obligation would be the principal loan (i.e., principal andinterest) to the borrower for the funds required to purchase a home or,in the case of a mortgage refinance, to satisfy the borrower's existingmortgage. If the principal debt obligation has risk characteristics,such as an LTV ratio that is above 80%, there would be a supplementaldebt obligation (e.g., interest only) that provides for supplementalinterest to compensate the lender for the additional risk of default.The amount of supplemental interest paid under the SI Mortgage isdetermined by the risk characteristics associated with the principalloan and is calculated based on the declining balance of the principaldebt obligation; there is no principal advanced under the supplementaldebt obligation; it would have a zero loan balance. If the risk were ahigh LTV ratio, the SI Mortgage could be used in lieu of mortgageinsurance. The SI Mortgage could be used, however, to protect against avariety of other lending risks. The supplemental interest debtobligation is based on the risk characteristics of the principal loan;consequently, the borrower's obligation to pay supplemental interestcould terminate without affecting the borrower's obligation on theprincipal debt if the risk is no longer present.

There is currently no home loan financing arrangement available that haseach of the characteristics of the SI Mortgage. For home loans withhigher than 80% LTV ratios, there currently exist three financingarrangements: (1) borrower paid mortgage insurance, (2) lender paidmortgage insurance, and (3) secondary financing. However, none of thesethree mortgage products combines the potential for tax deductibility,the cancellation ability, and the flexibility of the SI Mortgage.

Conventional home mortgage lenders require borrowers to obtain mortgageinsurance where the LTV ratio is greater than 80%. The mortgageinsurance coverage protects these lenders in the event of a paymentdefault by their borrowers. Borrowers pay the mortgage insurance premiumin addition to their regular monthly home loan principal and interestpayment. While the amount borrowers pay as interest to their lenders onthe home loan are tax deductible under current U.S. tax laws, thepremium paid for the mortgage insurance is not tax deductible. Oneadvantage of mortgage insurance, however, is that under current federallaw, mortgage insurance must be cancelled when the LTV ratio is reducedto 78%, and under certain other circumstances.

Lender-paid mortgage insurance is a variation on borrower-paid mortgageinsurance where, as the name implies, the lender agrees to pay thepremiums. There are some advantages and disadvantages for the borrower.On the one hand, because the lender charges the borrower a higherinterest rate to cover its costs to pay the mortgage insurance premiums,it does permit the borrower to deduct from its income taxes the interestpaid on the home loan. However, unlike borrower-paid mortgage insurancewhich must be cancelled when the LTV ratio is reduced to 78%, theadditional interest payment continues until the loan is paid off.

Some borrowers avoid paying any mortgage insurance premiums by securinga conventional first home mortgage loan for 80% of the value of the homeand securing it with a second home mortgage loan in the amount of fundsneeded to provide sufficient funds to purchase the home or refinance anexisting loan. Lenders originating these first and second home mortgageloans as an alternative to mortgage insurance have found that the twomortgages in the aggregate are similar in their risk characteristics toa single home mortgage loan with an LTV ratio of 90% or higher (i.e.,mortgages that would have mortgage insurance as a risk protection).However, because the borrower would not have obtained any mortgageinsurance when the financing arrangement uses two home mortgage loans,the lender of the first home mortgage loan is exposed to the increasedrisk of default without any compensation for having assumed theincreased risk. This two mortgage arrangement also results in additionalprocessing and lien recordation costs associated with the secondmortgage.

The SI Mortgage will better position home mortgage lenders to offer themarketplace a product that competes with first and second home mortgageloan financing programs. The SI Mortgage would also reduce the mortgagelender's risk exposure and would enable borrowers to take advantage ofthe benefits of a cancelable supplemental interest debt obligation alongwith the potential opportunity for tax deductibility.

Cancellation of the supplemental interest debt obligation could occurwhen the risk characteristics are no longer present, such as when theLTV ratio of the principal loan is reduced to 78%, or when theborrower's risk profile improves. Cancellation of the supplementalinterest obligation could occur automatically, when certain pre-setconditions are met. Cancellation of the supplemental interest obligationcould also occur at the borrower's request, when certain pre-setconditions are met. When the supplemental interest debt obligation iscancelled, the principal loan remains in place with all of its originalterms and obligations. If not previously cancelled, the supplementaldebt obligation would be cancelled once the primary debt obligation ispaid in full. Because the terms of the principal loan would bepredictable and will be consistent with other standard first mortgageloan products, the loans representing the principal loan could becombined with other loans having similar characteristics into mortgageloan pools. Securities dealers could then sell securities, known asmortgage-backed securities, that include, along with other comparablemortgage products, the principal loan. Because the terms of theprincipal loan are consistent with other first mortgage loans, they canbe pooled into pools of mortgage-backed securities that can be sold toinvestors, thus providing new funds for continued mortgage financing.This brings liquidity and efficiency into the mortgage financing marketand reduces borrowing costs to consumers.

Referring now to FIG. 1, a chart illustrating an interest calculationand payment calculation method according to an embodiment of the presentinvention is shown. The illustration of FIG. 1 assumes: a principal loanamount of $200,000.00; an annual interest rate on principal loan of6.5%; a term of 30 years; and a supplemental interest rate of 0.78%. Thechart of FIG. 1 illustrates how a principal curtailment on the principalloan would affect the amount of interest due on the second loan.

In month 7, the borrower made a curtailment, larger than the necessaryprincipal payment of $15,000 against the first mortgage. Thiscurtailment is done to illustrate to extent to which the payment on theSI Mortgage component would change based on the unpaid balance of thefirst mortgage and does not represent a typical borrower situation.

Example Implementations

The calculations of the present invention (or portion(s) thereof) may beimplemented using hardware, software or a combination thereof and may beimplemented in one or more computer systems or other processing systems.However, the manipulations performed by the present invention were oftenreferred to in terms, such as adding or comparing, which are commonlyassociated with mental operations performed by a human operator. No suchcapability of a human operator is necessary, or desirable in most cases,in any of the operations described herein which form part of the presentinvention. Rather, the operations are machine operations. Usefulmachines for performing the operation of the present invention includegeneral purpose digital computers or similar devices.

In fact, in one embodiment, the invention is directed toward one or morecomputer systems capable of carrying out the functionality describedherein. An example of a computer system 200 is shown in FIG. 2.

The computer system 200 includes one or more processors, such asprocessor 204. The processor 204 is connected to a communicationinfrastructure 206 (e.g., a communications bus, cross-over bar, ornetwork). Various software embodiments are described in terms of thisexemplary computer system. After reading this description, it willbecome apparent to a person skilled in the relevant art(s) how toimplement the invention using other computer systems and/orarchitectures.

Computer system 200 can include a display interface 202 that forwardsgraphics, text, and other data from the communication infrastructure 206(or from a frame buffer not shown) for display on the display unit 230.

Computer system 200 also includes a main memory 208, preferably randomaccess memory (RAM), and may also include a secondary memory 210. Thesecondary memory 210 may include, for example, a hard disk drive 212and/or a removable storage drive 214, representing a floppy disk drive,a magnetic tape drive, an optical disk drive, etc. The removable storagedrive 214 reads from and/or writes to a removable storage unit 218 in awell known manner. Removable storage unit 218 represents a floppy disk,magnetic tape, optical disk, etc., which is read by and written to byremovable storage drive 214. As will be appreciated, the removablestorage unit 218 includes a computer usable storage medium having storedtherein computer software and/or data.

In alternative embodiments, secondary memory 210 may include othersimilar devices for allowing computer programs or other instructions tobe loaded into computer system 200. Such devices may include, forexample, a removable storage unit 222 and an interface 220. Examples ofsuch may include a program cartridge and cartridge interface (such asthat found in video game devices), a removable memory chip, such as anerasable programmable read only memory (EPROM), or programmable readonly memory (PROM)) and associated socket, and other removable storageunits 222 and interfaces 220, which allow software and data to betransferred from the removable storage unit 222 to computer system 200.

Computer system 200 may also include a communications interface 224.Communications interface 224 allows software and data to be transferredbetween computer system 200 and external devices. Examples ofcommunications interface 224 may include a modem, a network interface(such as an Ethernet card), a communications port, a Personal ComputerMemory Card International Association (PCMCIA) slot and card, etc.Software and data transferred via communications interface 224 are inthe form of signals 228 which may be electronic, electromagnetic,optical or other signals capable of being received by communicationsinterface 224. These signals 228 are provided to communicationsinterface 224 via a communications path (e.g., channel) 226. Thischannel 226 carries signals 228 and may be implemented using wire orcable, fiber optics, a telephone line, a cellular link, an radiofrequency (RF) link and other communications channels.

In this document, the terms “computer program medium” and “computerusable medium” are used to generally refer to media such as removablestorage drive 214, a hard disk installed in hard disk drive 212, andsignals 228. These computer program products provide software tocomputer system 200. The invention is directed to such computer programproducts.

Computer programs (also referred to as computer control logic) arestored in main memory 208 and/or secondary memory 210. Computer programsmay also be received via communications interface 224. Such computerprograms, when executed, enable the computer system 200 to perform thefeatures of the present invention, as discussed herein. In particular,the computer programs, when executed, enable the processor 204 toperform the features of the present invention. Accordingly, suchcomputer programs represent controllers of the computer system 200.

In an embodiment where the invention is implemented using software, thesoftware may be stored in a computer program product and loaded intocomputer system 200 using removable storage drive 214, hard drive 212 orcommunications interface 224. The control logic (software), whenexecuted by the processor 204, causes the processor 204 to perform thefunctions of the invention as described herein.

In another embodiment, the invention is implemented primarily inhardware using, for example, hardware components such as applicationspecific integrated circuits (ASICs). Implementation of the hardwarestate machine so as to perform the functions described herein will beapparent to persons skilled in the relevant art(s).

In yet another embodiment, the invention is implemented using acombination of both hardware and software.

CONCLUSION

The present invention is described in terms of the above embodiments.This is for convenience only and is not intended to limit theapplication of the present invention. In fact, after reading thedescription of the present invention, it will be apparent to one skilledin the relevant arts how to implement the present invention inalternative embodiments.

In addition, it should be understood that the Figures described above,which highlight the functionality and advantages of the presentinvention, are presented for example purposes only. The architecture ofthe present invention is sufficiently flexible and configurable, suchthat it may be utilized in ways other than those shown in the Figures.

Further, the purpose of the Abstract is to enable the U.S. Patent andTrademark Office and the public generally, and especially thescientists, engineers and practitioners in the art who are not familiarwith patent or legal terms or phraseology, to determine quickly from acursory inspection the nature and essence of the technical disclosure ofthe application. The Abstract is not intended to be limiting as to thescope of the present invention in any way.

1. A computer implemented method of structuring a supplemental interestmortgage, comprising: issuing a principal debt obligation to a borrower,wherein the principal debt obligation is issued over a communicationsnetwork connected to a computer processor on which the principal debtobligation is calculated; wherein the principal debt obligationcomprises (i) a principal loan based on a principal debt amount andhaving original terms, and (ii) a principal interest to compensate alender for the borrower's use of the principal debt amount; anddetermining on the computer processor a supplemental debt obligation tothe borrower based on the principal debt amount, wherein thesupplemental debt obligation is issued over a communications networkconnected to the computer processor on which the supplemental debtobligation is calculated; cancelling the supplemental debt obligationwhen at least one risk characteristic is reduced to at least onepredetermined condition without cancelling the principal debt obligationand without changing the original terms and the principal debt amount ofthe principal debt obligation; wherein the supplemental debt obligationcomprises a supplemental interest based on the principal debt amount tocompensate the lender for a risk of nonpayment by the borrower; andwherein the principal debt obligation and the supplemental debtobligation are secured by a single security instrument.
 2. The method ofclaim 1, wherein the supplemental interest mortgage is utilized topurchase a house.
 3. The method of claim 1, wherein the principal debtobligation satisfies a borrower's existing mortgage.
 4. The method ofclaim 1, wherein the at least one risk characteristic is a loan-to-value(LTV) ratio that is reduced to a predetermined ratio.
 5. The method ofclaim 1, wherein the at least one risk characteristic is a credit scorethat is below a predetermined threshold value.
 6. The method of claim 5,wherein the credit score is a Fair Isaac Credit Organization (FICO)credit score.
 7. The method of claim 1, further comprising combining theprincipal debt obligation with other loans having similarcharacteristics into a mortgage loan pool.
 8. The method of claim 7,wherein the mortgage loan pool is included in a mortgage-backedsecurity.
 9. The method of claim 1, further comprising: canceling thesupplemental debt obligation based on payment of a portion of theprincipal debt amount.
 10. The method of claim 1, wherein the principaldebt obligation and the supplemental debt obligation are issued by thesame lender.
 11. The method of claim 1, wherein the supplemental debtobligation is interest only.
 12. The method of claim 1, wherein thesupplemental interest mortgage is structured without borrower-paidmortgage insurance.
 13. A computer program product comprising a computerusable medium having control logic stored therein for causing a computerto perform calculations for a supplemental interest mortgage, saidcontrol logic comprising: first computer readable program code means forcausing the computer to issue a principal debt obligation to a borrower;wherein the principal debt obligation comprises (i) a principal loanbased on a principal debt amount and having original terms, and (ii) aprincipal interest to compensate a lender for the borrower's use of theprincipal debt amount, wherein the principal debt obligation is issuedover a communications network connected to a computer processor on whichthe principal debt obligation is calculated; and second computerreadable program code means for causing the computer to issue asupplemental debt obligation to the borrower based on the principal debtamount, wherein the supplemental debt obligation is issued over acommunications network connected to the computer processor on which thesupplemental debt obligation is calculated; third computer readableprogram code means for causing the computer to cancel the supplementaldebt obligation when at least one risk characteristic is reduced to atleast one predetermined condition without cancelling the principal debtobligation and without changing the original terms and the principaldebt amount of the principal debt obligation, wherein the supplementaldebt obligation is canceled over a communications network connected tothe processor on which the supplemental debt obligation is calculated;and wherein the supplemental debt obligation comprises a supplementalinterest based on the principal debt amount to compensate the lender fora risk of nonpayment by the borrower; and wherein the principal debtobligation and the supplemental debt obligation are secured by a singlesecurity instrument.
 14. The computer program product of claim 13,wherein the third computer readable program code means causes thecomputer to cancel the supplemental debt obligation when a conditionrelating to a lender's risk exposure is met.
 15. A computer implementedmethod of structuring a supplemental interest mortgage, comprising:issuing a principal debt obligation to a borrower, wherein the principaldebt obligation is issued over a communications network connected to acomputer processor on which the principal debt obligation is calculated;wherein the principal debt obligation comprises (i) a principal loanbased on a principal debt amount and having original terms, and (ii) aprincipal interest to compensate a lender for the borrower's use of theprincipal debt amount; and determining on the computer processor asupplemental debt obligation to the borrower based on the principal debtamount, wherein the supplemental debt obligation is issued over acommunications network connected to the computer processor on which thesupplemental debt obligation is calculated; cancelling the supplementaldebt obligation when at least one risk characteristic is reduced to atleast one predetermined condition without cancelling the principal debtobligation and without changing the original terms and the principaldebt amount of the principal debt obligation; wherein the supplementaldebt obligation comprises a supplemental interest based on the principaldebt amount to compensate the lender for a risk of nonpayment by theborrower; wherein the principal debt obligation and the supplementaldebt obligation are secured by a single security instrument; and whereinthe borrower pays the principal interest and the supplemental interestin periodic payments.
 16. The method of claim 15, wherein thesupplemental interest mortgage is structured without borrower-paidmortgage insurance.
 17. The method of claim 15, wherein the periodicpayments comprising the supplemental interest and the principal interestare paid concurrently by the borrower.
 18. A computer program productcomprising a computer usable medium having control logic stored thereinfor causing a computer to perform calculations for a supplementalinterest mortgage, said control logic comprising: first computerreadable program code means for causing the computer to issue aprincipal debt obligation to a borrower; wherein the principal debtobligation comprises (i) a principal loan based on a principal debtamount and having original terms, and (ii) a principal interest tocompensate a lender for the borrower's use of the principal debt amount,wherein the principal debt obligation is issued over a communicationsnetwork connected to a computer processor on which the principal debtobligation is calculated; and second computer readable program codemeans for causing the computer to issue a supplemental debt obligationto the borrower based on the principal debt amount, wherein thesupplemental debt obligation is issued over a communications networkconnected to the computer processor on which the supplemental debtobligation is calculated; third computer readable program code means forcausing the computer to cancel the supplemental debt obligation when atleast one risk characteristic is reduced to at least one predeterminedcondition without cancelling the principal debt obligation and withoutchanging the original terms and the principal debt amount of theprincipal debt obligation; wherein the supplemental debt obligationcomprises a supplemental interest based on the principal debt amount tocompensate the lender for a risk of nonpayment by the borrower; andwherein the principal debt obligation and the supplemental debtobligation are secured by a single security instrument, and wherein theborrower pays the principal interest and the supplemental interest inperiodic payments.
 19. The computer program product of claim 18, whereinthe supplemental interest mortgage is structured without borrower-paidmortgage insurance.
 20. The computer program product of claim 19,wherein the periodic payments comprising the supplemental interest andthe principal interest are paid concurrently by the borrower.